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4. Audit Approach Overall Approach In addition, we will develop an understanding of how the entity selects and applies its accounting policies and consider their appropriateness. This understanding will include (1) methods of accounting for significant and unusual transactions, (2) the effects of significant accounting policies in emerging or controversial areas for which consensus or authoritative guidance is lacking, (3) identification of new financial reporting standards and regulations pertinent to the entity, including how the entity will implement them, and (4) changes in the entity's accounting policies, including consideration of the reasons for, and the appropriateness of the changes. The understanding of internal controls will include, at a minimum, the following: For significant classes of transactions: An understanding of the entity's processes and controls over the initiating, authorizing, recording, processing, and reporting of transactions. For material accounts: An understanding of reconciliation controls related to material accounts. We will develop our understanding of reconciliation controls related to material accounts even if the account is not part of a significant class of transactions. For example, we may not consider the property account to be a part of a significant class of transactions for a particular entity, but if the property account is material, we will still gain an understanding of applicable reconciliation controls. For significant or fraud risks: An understanding of the controls related to that specific risk. We cannot evaluate the design of the controls by assessing individual controls in isolation. Rather, we will assess the controls in a transaction cycle as a group, as follows: Obtain an understanding of the processes and flow of information through the transaction cycle. Determine what can go wrong within the transaction cycle. Determine whether the controls are sufficient to address the instances of what can go wrong within the transaction cycle. In determining whether the controls in a process are designed effectively, we will use a top-down approach: one in which we first consider the design of entity -level controls relevant to the process and then consider the activity -level controls. The entity -level controls that generally have the most direct impact on the function of the activity -level controls are the controls related to monitoring and general controls for IT. The effectiveness of activity -level controls is significantly affected by the effectiveness of entity -level controls. For example, an entity may have poor segregation of duties in the accounts payable/cash disbursements area and may compensate for this deficiency through a thorough review and approval of each disbursement. If the entity has an effective control environment, general controls for IT that limit access to accounts payable applications to one or a few people, and monitoring controls to ensure the review and approval process is functioning correctly, we may determine that controls over the accounts payable/cash disbursements function are adequately designed. On the other hand, if the entity does not have a strong control environment and does not monitor the review and approval process, we would conclude that controls over the accounts payable/cash disbursements process are not designed effectively. Evaluating the design of internal controls requires experience and familiarity with accounting and financial reporting systems. The auditors obtaining an understanding of your internal controls will have sufficient knowledge and experience to effectively accomplish the objectives of this process. A PROPOSAL TO INDIAN RIVER COUNTY 27